Rupees and Dollars: New national roles in the global order

May 2007

Recent events in the realms of economics and security reveal a new division of labor among major states.

The value of the Indian rupee has increased significantly in relation to the U.S. dollar in recent weeks. This has happened during a period of accelerated inflation in India, which would normally cause the rupee to decline against the dollar. The rising rupee means that Indian manufacturers will be at a growing disadvantage. They will have rising costs in dollars, even though they are not gaining in terms of labor discipline, land access, or infrastructure in comparison to their competitors.

India has given up on becoming a manufacturing power, choosing to focus instead in the area of its overwhelming comparative advantage—information services. This is not a voluntary choice. India has not been able to discipline itself to the point where it could be a significant competitor to China in manufacturing.

On the other hand, information-led growth in India is not a tragedy either. The global demand for information services will rise faster than that for manufacturing in the coming decades. Manufacturing itself will continue to become more information-intensive, and that will play to India's favor. Nor does information led-development mean that only a few will benefit within India. First, each job in the Indian information services sector has recently been found to generate four other jobs. Second, the number of information services employees has been doubling every three years. The continued growth of private education and commercial training will sustain this boom. If we look at the background of those who are joining the industry now, we find many from lower middle class origins. This means that India has found a way to make its lower middle class youths into world-class information workers. This class forms the majority of Indian society at present and so the boom has a long run ahead.

China is also stuck, if not in a bad place. It has had a long manufacturing- and export-led boom, and is building large trade surpluses. But China has not been able to adjust to a more domestically oriented economy. While urban China is gaining world-class buildings and infrastructure, in both quantity and quality, and Chinese people are moving to cities—a majority should be urban within a decade—rural China is stagnating. Income inequality is rising rapidly in China, and is considerably worse than in India.

A political coalition has emerged between the Communist Party and the overseas Chinese business community. The latter is oriented toward low-technology manufacturing. The current Chinese development strategy serves this dominant coalition as much as any overall economic need. A reorientation of the Chinese economy away from exports and toward production for the internal market would generate new competitors for the dominant coalition in both business and politics. This coalition has cost the Chinese people $1 trillion. That is the size of China's foreign currency reserves, which are loaned out at very low interest rates, mainly to the U.S. government.

Chinese loans to the U.S. government are so large that they form a pillar of the American political economy. It is because of the Chinese trade surplus and its communist-capitalist political coalition that America can pursue its path of low taxes on the rich and foreign military adventures.

America's income inequality is worse than China's. The Iraq War has made Bush and the conservatives unpopular, yet the question of inequality as such is still not a major political issue. India is also upholding economic inequality in America. The rising inflow of cheap sophisticated software and other information services from India is doing a lot for profits but only a little for wages in the American service-oriented economy. Worse, American college students are avoiding subjects that bring them directly into competition with Indians. Yet those are the subjects most crucial to the world's economic future, and thus the most lucrative on the long run. As a result, all but the richest 10 percent of Americans are stagnating economically.

In the realm of security, the epicenter of the jihadi threat is shifting to Pakistan. The military exhaustion of America and its allies, vividly exposed by Iran's taking of British prisoners, leaves India as the only bulwark against this new threat. Pakistan has long had the largest pool of jihadis, and they are becoming bolder. The most prominent mosque in Islamabad is demanding the imposition of full Islamic law, its affiliated students are taking vigilante actions, and the government is watching with compelled passivity. Musharraf has never enjoyed popular legitimacy, and his ability to mobilize even the army to fight for his dictatorship is uncertain. This is a creeping coup and the West is helpless to stop it.

Within Pakistan, the migrants from India, led by the political party MQM, are proving the most committed anti-jihadi force. Their historic immersion in India's composite culture and their disappointment in Pakistan make them more sensitive to the evil of fundamentalism. Musharraf is also a migrant, from Delhi in fact. He has made a limited alliance with MQM, but to survive he would need to go much farther, bringing migrants into the army in large numbers at all ranks.

India cannot intervene unilaterally in Pakistani affairs. But it can play a supportive role in cooperation with the least fundamentalist segments of Pakistan in the globally vital struggle to keep jihadis and nuclear weapons apart. n

Sanjoy Banerjee teaches international relations at San Francisco State University. He writes about India, America, and the world.

If we look at the background of those who are joining the industry now, we find many from lower middle class origins. This means that India has found a way to make its lower middle class youths into world-class information workers.

It is because of the Chinese trade surplus and its communist-capitalist political coalition that America can pursue its path of low taxes on the rich and foreign military adventures.

Pakistan has long had the largest pool of jihadis, and they are becoming

bolder.

By SANJOY BANERJEE

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